Friday, January 12, 2007


The Business reports that China is moving rapidly forward towards the radical tax reform based on the adoption of the flat tax of 25% on personal and corporate income. Advantages of the flat tax have been extensively stressed by Mr. Alvin Rabushka in one of his recent research papers - The Flat Tax in Russia and the New Europe. Rapidly growing economies in Eastern Europe and Russia have adopted pro-growth flat tax rates. Individuals, companies and the whole economy have vastly benefited from the radical tax reform. China is now achieving high rates of economic growth. The vastness of the market, the price of the labor, good channels of global logistics and the opportunity to yield high returns have been the main components of foreign direct participation. Through the exercise of international openness, Chinese market has attracted numerous global investment projects. As the largest growing economy in the world, China is now facing a growing need to adopt the policy of tax competition in order release its economic potentials and thus evenly higher economic growth which is the main channel of the international competitiveness. Sound tax policy is a good sign of economic recovery and progress. Further steps toward liberalization of the economic system are vastly needed. Increased flows of labor and investment capital could bring positive effects to Chinese economy in the long-run as well as a decreasing role of government must come into action. Flat tax will have an important effect on the tax jurisdicition itself. Flat tax textbooks provide a decent and stimulataneous economic policy. Many of those textbooks have recently been translated into Chinese.

In order to improve the economic survey of Chinese economy, competitive domestic markets are needed to take its place and give the best of their ability to pursue an improved economic performance. I warmly welcome the aims of Chinese policymakers who seem to recognize the importance of competitive tax agenda for a long-run economic performance. The adoption of a tax policy with low tax rates will not result in a decline of total tax revenues. In the case of Russian radical tax reform, tax revenues increased dramatically since the flat tax was successfully implemented. In 2001, total revenues were 28 percent higher, in 2002, the share of increase collected revenues was 54,5% higher while in 2003 personal income tax revenues grew amazingly by 80,1%. Of course, many other policy features are still needed to improve the competitiveness of the Chinese economy in the global arena. The economic miracle of Eastern European economies is a nice example of how a simple, transparent and efficient tax framework results in the accelerated pace of economic growth. And the flat tax is an excellent step in that particular direction.

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